VZCZCXRO0415
RR RUEHCN RUESLE
DE RUEHBU #0081/01 0241732
ZNR UUUUU ZZH
R 241732Z JAN 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0106
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6785
RUEHBJ/AMEMBASSY BEIJING 0184
RUEHMN/AMEMBASSY MONTEVIDEO 6982
RUEHSG/AMEMBASSY SANTIAGO 1007
RUEHBR/AMEMBASSY BRASILIA 6668
RUEHLP/AMEMBASSY LA PAZ 5079
RUEHCV/AMEMBASSY CARACAS 1684
RUEHCN/AMCONSUL CHENGDU 0012
RUEHGZ/AMCONSUL GUANGZHOU 0104
RUEHHK/AMCONSUL HONG KONG 0031
RUEHRI/AMCONSUL RIO DE JANEIRO 2417
RUEHSO/AMCONSUL SAO PAULO 3633
RUESLE/AMCONSUL SHANGHAI 0028
RUEHSH/AMCONSUL SHENYANG 0016

UNCLAS SECTION 01 OF 04 BUENOS AIRES 000081 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
PASS NSC FOR MICHAEL SMART 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
PASS USTR FOR KATHERINE DUCKWORTH AND MARY SULLIVAN 
TREASURY FOR ROSELLEN ALBANO 
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
US SOUTHCOM FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ETRD EINV AR CH
SUBJECT: ARGENTINA-CHINA TRADE UPDATE: IMPORTS NOT CROWDING OUT 
PRODUCTION 
 
Refs: (A) Buenos Aires 1708 
      (B) Buenos Aires 1648 
      (C) Buenos Aires 1644 
 
------- 
Summary 
------- 
 
¶1. (SBU) In response to a surge in goods imports from China, the GoA 
imposed a series of "non-discriminatory" non-tariff trade 
restrictions implicitly aimed at Chinese goods seen as crowding out 
domestic production.  Argentina's trade surplus with China peaked in 
2003 at $1.8 billion, but may have turned the corner from surplus to 
deficit at the end of 2007.  While exports to China grew 32% in the 
first half of 2007 (vs. the first half of 2006), Chinese imports 
increased 96% in the same period.  (Overall Argentine exports and 
imports rose 8.8% and 25%, respectively, in the first half of 2007.) 
 GoA officials have singled out specific goods from China as 
potential threats to local producers, given the rapid increase of 
imports of those products.  However, domestic production of these 
same goods has also increased, undermining the GoA's argument for 
imposing restrictions.  The Chinese government initially criticized 
the measures as WTO-inconsistent, but has not retaliated in kind or 
complained formally to the WTO.  The instinctively protectionist 
response of the previous Kirchner government to rising imports helps 
explain the defensive nature of the GoA's Doha Round negotiating 
position, which may well continue under the new Kirchner government. 
 End Summary. 
 
--------------------------- 
The Perceived Chinese Flood 
--------------------------- 
 
¶2. (SBU) Beginning in August, the government of Argentina imposed a 
series of non-tariff trade restrictions targeting Asian imports, 
which included limiting the port-of-entry for numerous goods, 
setting thousands of new region-specific reference prices, and 
imposing new non-automatic import licenses on some products (Ref B). 
 On August 17, then-President Kirchner and then-Economy Minister 
Peirano announced the measures as defense against "unfair 
competition" (Ref C) from a group of thirteen Asian countries.  Post 
private sector contacts tell us, however, that the majority of goods 
affected are in fact imported from China.  While GoA officials claim 
these measures are non-discriminatory and WTO-compliant, the GoA 
rhetoric that preceded their implementation clearly singled out 
burgeoning China imports perceived as crowding out domestic 
production.  The Chinese government initially complained that the 
Argentine measures were WTO-inconsistent and claimed the right to 
take "necessary measures" in response.  However, the PRC has to date 
not followed through on this threat nor formally approached the 
WTO. 
 
--------------------------------------------- - 
A Declining Argentine Trade Surplus with China 
--------------------------------------------- - 
 
¶3. (U) Argentina has maintained a bilateral trade surplus with China 
since 2001.  The surplus peaked in 2003 at $1.76 billion.  (Unless 
otherwise stated, all trade data herein is for goods only and comes 
from the Global Trade Atlas, www.gtis.com, which reportedly obtains 
its data directly from the GoA.)  By the end of 2006, the annual 
surplus had fallen to $1.32 billion, and it dropped precipitously - 
55% - in 2007, from $663 million in the first half of 2006 to $299 
million in the first half of 2007.  Argentina's overall trade 
 
BUENOS AIR 00000081  002 OF 004 
 
 
surplus is also shrinking, albeit at a slower pace.  After 
increasing 5.2% in 2006 to $12.3 billion (and 11.5% in the first 
half of 2006, to $6.2 billion), the overall surplus dropped in the 
first half of 2007 to $5.2 billion, a 16% y-o-y decrease. 
 
¶4. (SBU) The clear trend of bilateral Argentine-China trade led both 
Diego Perez Santisteban, President of the Argentine Chamber of 
Importers (CIRA), and MFA Trade Secretary Alfredo Chiaradia, to 
predict that the bilateral surplus with China turned to a deficit by 
the end of 2007.  (The final 2007 trade numbers for China are not 
yet available.)  Embassy contacts in the Economy Ministry confirm 
that these headline bilateral trade numbers were a large part of the 
motivation for the GoA's imposition of new trade restrictions. 
 
----------------------------- 
Burgeoning Imports from China 
----------------------------- 
 
¶5. (U) Imports from China climbed to an all-time high of $2.15 
billion in 2006, up 41% from 2005 levels, vs. a 19% increase in 
Argentine 2006 global imports (including China).  Chinese imports 
further accelerated in 2007, with the total in the first half 
reaching $1.8 billion, a 96% y-o-y increase.  Argentine global 
imports increased 25% in the same period.  China, having passed 
Germany in 2005, was Argentina's third-largest supplier of goods in 
2006 and the first part of 2007, behind Brazil and the U.S. 
 
¶6. (U) Imports from China are concentrated in capital goods - over 
40% of 2006 imports from China were in electrical machinery and 
machinery.  Organic chemicals accounted for another 12%.  While 
those shares have remained relatively steady over the last few 
years, imports of Chinese vehicles and parts have risen rapidly, 
from $9.4 million (1.3% of imports) in 2003 to $198 million (9.2% of 
imports) in 2006.  In the first half of 2007, electrical machinery 
and machinery have jumped to 48% of total imports.  China is also 
Argentina's top supplier of toys and sporting goods, leather goods, 
miscellaneous manufactured goods, base metal, and musical 
instruments (though by value, only toys and sporting goods, at No. 
6, is in the top 10 categories of Chinese imports). 
 
¶7. (SBU) The sharp increase in imports from China has been felt the 
most in Argentina in a few specific categories - such as 
motorcycles, leather handbags, toys, and tires - that have been 
singled out in speeches by GoA officials and businesspeople when 
speaking about the new import measures.  For example, motorcycle 
imports increased over 8000% from 2003 to 2006 (and 161% in 2006 vs. 
2005), from $1.7 million to $145 million, and are now the single 
largest line item in Argentina's imports from China.  Leather 
handbags and luggage imports have risen 465% since 2002 (46% in 
2006), up to over $38 million.  Toy imports are up 536% since 2002 
(31% in 2006), with the 2006 total just under $38 million.  Imports 
of tires were much less than those at $19.5 million, but that 
represents an increase of 1045% since 2002 (and 7% in 2006).  The 
same products have also seen marked increases in 2007 imports.  For 
the first half of 2007, imports of motorcycles, leather handbags and 
luggage, toys, and tires from China have increased 81%, 69%, 86% and 
59% y-o-y respectively. 
 
---------------------------------------- 
Impact of Imports on Domestic Production 
---------------------------------------- 
 
¶8. (SBU) Argentines' fear of rising imports would make sense if 
domestic production was being harmed, but that does not seem to be 
 
BUENOS AIR 00000081  003 OF 004 
 
 
the case.  While imports from China and elsewhere of those specific 
goods have increased, so has domestic production, according to data 
obtained from local chambers representing the importers and 
manufacturers of those goods.  Motorcycle production in Argentina 
rose 229% from 2004-06.  The quantity of imported tires from China 
rose 12% from 2004 to 2006, as domestic production increased by 15%. 
 Domestic toy production also has risen 30% (in nominal terms) each 
year since 2004, though specific duties on such imports have been 
gradually lowered during that period. 
 
¶9. (SBU) Despite the precipitous rise in Chinese imports in these 
specific categories of products, the GoA has not initiated any 
antidumping cases against China.  One likely reason for this is that 
the GoA could institute these new measures quickly (some of them 
took effect the day after publication), whereas antidumping 
investigations can take months.  However, it may also be a tacit 
admission by the GoA that such cases lack sufficient merit to 
withstand a WTO challenge, since domestic production has not fallen. 
 The reality is that domestic consumption of all these goods has 
grown along with the overall rapid growth of the Argentine economy. 
While Argentine manufacturing has grown in response to this demand, 
more competitive imports have captured a majority of the increase. 
 
--------------------------------------------- 
Exports to China Growing, but Low Value-Added 
--------------------------------------------- 
 
¶10. (U) Argentine exports to China hit $3.47 billion in 2006, a new 
bilateral record, and up 8.8% over year-end 2005.  In the first half 
of 2007, they grew 32% y-o-y, reaching nearly $2.1 billion.  Exports 
to China grew at a much faster pace than global Argentine exports, 
which rose 15% in 2006 and 13% in the first half of 2007 y-o-y (to 
$46.5 and $24.7 billion respectively).  China was Argentina's 
fourth-largest export market from 2003-06, but moved up to number 
two - passing Chile and the United States - in the first half of 
¶2007. 
 
¶11. (SBU) Over 95% of Argentina's exports to China were agricultural 
and animal goods, hydrocarbons, mining and seafood, led by $2.07 
billion worth of soy and soy products, comprising nearly 60% of 
total 2006 exports to China.  Fully two-thirds of Argentine soy 
shipped to China (over $1.4 billion) was in the form of raw 
soybeans, with another 30% ($630 million) in soy oil.  Those 
proportions stand in sharp contrast to Argentine soy exports to the 
rest of the world, of which only 20% was raw soy (80% of Argentine 
raw soy exports went to China), 31% soy oil, and nearly 50% soy 
oilcake.  According to Ministry of Economy trade contacts, the 
difference in Argentina's export tax rate on unprocessed soybeans 
(27.5%) vs on processed soy (24%) was designed to encourage higher 
value-added agricultural sector exports.  This puts the composition 
of soy exports to China in even starker contrast.  However, while 
Argentina's soy crushing capacity of 46 million metric tons per year 
is the third highest in the world, and projected by the private 
sector to be operating at 83% capacity in the current harvest 
season, China's crushing capacity is some 50% higher.  Hydrocarbons 
followed soy, with 26% of total exports, while leather, beef and 
wool combined for nearly 6%.  Mining (mostly copper) was under 2% 
and fishing was 1.5%. 
 
------- 
COMMENT 
------- 
 
¶12. (SBU) Post's contacts in the private sector (and also many media 
 
BUENOS AIR 00000081  004 OF 004 
 
 
analysts) speculate that then-President Nestor Kirchner's decision 
to impose non-tariff barriers -- and his tough talk that accompanied 
it -- was merely pre-election strategy to boost his wife Cristina 
Fernandez de Kirchner's presidential campaign.  However, there is 
also speculation that Kirchner was motivated by a long-held 
grievance against the PRC: when Argentina recognized China as a 
market economy in late 2004 for China's WTO accession, Chinese 
President Hu Jintao appeared to promise during a visit to Argentina 
that Chinese firms would invest up to $20 billion in Argentina, 
which has yet to materialize.  Some concern may also arise from the 
fact that China apparently passed Argentina in 2007 to become the 
second-largest exporter to Brazil. 
 
¶13. (SBU) Regardless of the political motivations behind the policy, 
the traditionally protectionist industrial sector and labor unions - 
a key constituency for the previous and current Kirchner governments 
-- will not make it easy for the GoA to reverse the new measures. 
Nevertheless, as CIRA President Diego Perez Santisteban predicted in 
late 2006 to the press, the clear trend is for Argentina to finish 
2007 with a bilateral trade deficit with China.  While the impact of 
the barriers is as yet unclear, and possibly minimal, they offer 
insight into the protectionist, mercantilist mind-set of the first 
Kirchner administration - which seems to have been largely 
reproduced in the current one.  The GoA has taken essentially the 
same stance (albeit on a much larger scale) in its Doha Round 
negotiations, seeking to limit the increase of imports, even in 
areas where Argentina's industry is not competitive, at the expense 
of potentially substantial gains from increased agricultural 
exports.  While the new government's economic leadership is still 
settling into office, there are no early indications that the new 
government will make significant changes. 
 
WAYNE